Russian Billions Scattered Abroad Show Trail to Putin Circle

April 28 (Bloomberg) -- Outside a Moscow stadium one night
in 2006, deputy central bank chief Andrei Kozlov was walking to
his car after playing soccer when two men opened fire, pumping
bullets into his head and neck and killing his driver.

Days before the murders, the man leading Russia’s fight
against money laundering had shut down a scheme used to funnel
$1.6 billion of dirty funds abroad, including at least $112
million via Vienna-based Raiffeisen Zentralbank Oesterreich AG,
according to Russian and Austrian investigators.

It was a trickle in a flood of illegal outflows that would
reach $52 billion in 2012 alone, according to former central
bank Chairman Sergey Ignatiev. Such flows are now in the cross
hairs of President Barack Obama’s efforts to penalize Vladimir
Putin for annexing Crimea and to halt his incursions into
Ukraine. Obama signed a law on aid to Ukraine this month that
includes a clause that allows the U.S. to go after assets of
Russian officials and their allies who are deemed complicit in
“significant corruption.”

“This is a declaration of war by the Obama administration
on the current governing Russian elite,” Ariel Cohen, senior
fellow at the Heritage Foundation, a Washington-based research
group, said by phone from New York. “There will be a lot of
people potentially targeted.”

Money Game

One possible weapon in this new battle is Dmitry Firtash,
48, the billionaire Ukrainian and major Raiffeisen client who
was arrested in Vienna last month on U.S. bribery charges,
according to Mark Galeotti, a Russian organized crime expert at
New York University who advises regulators on money laundering.

A longtime ally of Viktor Yanukovych, the ousted Ukrainian
president who fled to Russia in February, Firtash made his
fortune as a middleman in OAO Gazprom’s secretive gas trade with
Ukraine, conduit for 15 percent of Europe’s supply and the most
corrupt country on the continent, according to Transparency
International. He’d be an invaluable asset to the U.S. if he
agrees to cooperate because he knows how Russian officials have
shifted billions of dollars into banks abroad, Galeotti said.

“Firtash knows the way the game is played, the way the
money is moved,” Galeotti said in an interview in Moscow.

Ignatiev told lawmakers last June that money laundering in
Russia, ranked the most corrupt major economy by Transparency
International, was so pervasive that fighting it consumed more
of his time than formulating monetary policy. In his last
address to parliament before stepping down after a decade in the
post, he highlighted one network in which 1,173 shell companies
channeled $24 billion to foreign banks.

‘Almost Anyone’

About half of all illegal capital flight, including bribes
to bureaucrats and revenue from criminal syndicates, “appears
to be controlled by one well-organized group of people,”
Ignatiev told the Vedomosti newspaper in a rare interview in
February 2013, without elaborating. Ignatiev, 66, is now an
adviser to his successor, Elvira Nabiullina.

The wording of the new U.S. law is so broad it could apply
to “almost anyone” close to Putin, 61, said Masha Lipman, an
analyst at the Carnegie Moscow Center who’s co-written academic
articles on Putin with former U.S. Ambassador Michael McFaul.

The U.S. today imposed sanctions on 17 Russian companies
and seven individuals, including Igor Sechin, CEO of OAO
Rosneft, the country’s largest oil producer. That adds to the
more than two dozen officials and billionaires penalized last
month for being what the Treasury Department called part of
Putin’s inner circle.

‘Body Blow’

An agreement to disarm pro-Russian rebels and anti-Russian
groups in Ukraine that both countries signed with the U.S. and
the European Union is on the brink of collapse. Secretary of
State John Kerry said Russia was trying to impose its will on
Ukraine by the “barrel of a gun and the force of a mob.”

Russia is already on the verge of recession, so the U.S.
can inflict major damage with industry-wide sanctions, according
to John Herbst, a former U.S. ambassador to Ukraine.

“Even without European support, U.S. sanctions against the
Russian financial sector would deal a body blow to the nation’s
economy,” Herbst said by e-mail.

The bribery charges against Firtash center on a $500
million Indian mining project and his alleged crimes include
falsifying documents to make bribe payments via unidentified
banks look legitimate.

U.S. ‘Hostage’

Firtash, who paid an Austrian record 125 million euros
($173 million) to win release during extradition hearings, has
called the case against him “purely political.” He declined to
comment for this story through a spokesman.

“Firtash is just a hostage,” said Kirill Kabanov, who
heads the National Anti-Corruption Committee, an independent
research group in Moscow. “They want him because he
theoretically knows all the schemes, how the flows are
organized. They are assuming he has a lot of information.”

Firtash’s role in Russian gas exports became public in
2006, when Raiffeisen, after pressure from the U.S., revealed
that it held, on behalf of Firtash and his partner, half of the
Swiss company that had just emerged as Ukraine’s sole supplier.
Gazprom owned the other half of the venture, RosUkrEnergo.

The announcement came after closed-door meetings in
Washington between Raiffeisen executives and U.S. officials who
were probing potential links between RosUkrEnergo and organized
crime, Wolfgang Putschek, then co-chief executive officer of
Raiffeisen Investment AG, told an Austrian parliamentary
commission in 2007.

Most-Wanted

Firtash told U.S. officials in Kiev in 2008 that he needed
the approval of Semion Mogilevich, an organized-crime suspect on
the Federal Bureau of Investigation’s most-wanted list, to get
into the gas trade with Gazprom, according to a secret cable
published by Wikileaks.

The FBI considers Mogilevich, 68, a Ukrainian-born Russian
citizen based in Moscow, to be the leader of a multinational
criminal network. He was indicted in the U.S. in 2003 on charges
of money laundering and fraud related to the 1998 collapse of a
Toronto-listed company based in Pennsylvania.

Firtash may know whether Ukrainian officials and managers
at Gazprom and its affiliate, Moscow-based Gazprombank, had
“personal economic interests” in RosUkrEnergo transactions,
former Gazprom Deputy CEO Alexander Ryazanov said in an
interview last month.

Gazprom, Gazprombank

Gazprom’s press service didn’t respond to an e-mailed
request for comment on its business with Firtash. Its spokesman,
Sergei Kupriyanov, said after Firtash’s arrest that the company
didn’t see any “negative consequences” from the possible
extradition of him to the U.S.

Publicly, Firtash has denied any link between Mogilevich
and RosUkrEnergo and an investigation by U.S. security firm
Kroll Inc. found no ties between them, Raiffeisen’s Putschek
said in 2007. A lawyer for Mogilevich denied the U.S. charges
against his client and any ties between him and RosUkrEnergo.

Raiffeisen declined to comment on its relationship with
Firtash, saying only that it operates in strict compliance with
all banking laws. The Chicago office of U.S. Attorney Zachary
Fardon, who announced the indictment, declined to comment on the
case, as did the Treasury Department in Washington.

Firtash continued to benefit from his ties with Gazprom and
Gazprombank even after the Ukrainian gas deal ended in 2009,
according to two people familiar with his finances who asked not
to be identified because the information is private.

Gas Discount

Ostchem Holding AG, the Austrian company that unites
Firtash’s Ukrainian fertilizer producers, buys gas from Gazprom
at a discounted price of about $270 per 1,000 cubic meters, or
30 percent less than Gazprom’s customers in Europe paid on
average last year, according to the people.

Ostchem imported about 13 billion cubic meters of the fuel
in 2013, said Natalia Ivanchenko, a spokeswoman for the company,
declining to say at what price. At $270 per 1,000 cubic meters,
that would come to about $3.5 billion, according to Bloomberg
calculations.

Firtash has borrowed about $2.8 billion from Gazprombank
over the past few years, secured by his Ukrainian assets, which
include a titanium deposit in Crimea, the people said.

Gazprombank declined to comment on its ties to Firtash.
First Vice President Ekaterina Trofimova said the lender
conducts business “in strict accordance with international
laws” and sees no “reasonable grounds” for sanctions.

Even so, Russia’s third-largest lender is preparing for
possible U.S. penalties, according to two people with knowledge
of the deliberations who asked not to be identified because the
information is confidential.

Bank Complicity

Galeotti, the organized crime expert, said in one way or
another, most major U.S. and European banks are complicit in
handling dirty money from Russia and other sanctioned countries.

“There are those who say, ‘as long as nothing obvious is
flagged up it’s OK,’ and there are those who implicitly assist
their customers to ensure that nothing gets flagged up,”
Galeotti said.

HSBC Holdings Plc in December 2012 agreed to pay $1.92
billion to settle U.S. probes of laundering funds of sanctioned
nations. ING Groep NV in June 2012 agreed to pay $619 million to
settle U.S. charges it falsified financial records to bypass
sanctions on countries including Cuba and Iran.

The U.S. has acted to punish Russians accused of corruption
before, as in the case of Sergei Magnitsky, a legal adviser to
London-based Hermitage Capital Management Ltd. who died in a
Moscow prison in 2009.

In 2012, Obama signed the Magnitsky Act, which led to
sanctions on 18 Russian officials and an undisclosed number of
others for what Congress determined to be involvement in
Magnitsky’s death and the fraudulent $230 million tax-rebate
scheme he uncovered.

Swiss Accounts

Hermitage, once the largest foreign owner of Russian
stocks, says it has traced the flows of $134 million of those
funds and successfully petitioned U.S. courts to force lenders
to turn over records of the transfers. As a result, authorities
have seized $24 million of New York real estate and have frozen
more than $10 million in Swiss accounts, according to Hermitage
chief Bill Browder, who’s been barred from Russia since 2005.

As the money crossed national borders, most of it was
converted into U.S. dollars, which had to pass, if only for a
split second, through a correspondent bank in New York,
according to Hermitage. The central role of the U.S. and
European banking systems in the global economy provides a tool
to go after the corrupt Russian officials behind the laundering,
Browder said by phone.

‘Permanent Mark’

“The thing about dirty money is that it’s completely
traceable, it leaves a permanent mark,” Browder said. “The
moment it leaves the ruble system and goes into the
international banking system, it leaves a trace forever.”

That was how Kozlov and his team of regulators managed to
shut down the laundering operation that went through a small
bank called Diskont just before he was gunned down.

Ignatiev, Kozlov’s boss at the central bank at the time,
said in his testimony to police, a transcript of which was seen
by Bloomberg, that he believed the murder was ordered by the
same people who were behind the Diskont scheme.

Investigators quickly dropped that line of inquiry, turning
their attention instead to Alexei Frenkel, whose VIP Bank had
lost its license three months earlier. In 2008, Frenkel, who
still maintains his innocence, was convicted of ordering the hit
and sentenced to 19 years in prison.

The verdict was condemned by a group of human rights
activists led by Lyudmilla Alexeyeva of the Moscow Helsinki
Group and Lev Ponomarev of For Human Rights, who monitored the
trial and concluded that Frenkel was framed by officials “at a
fairly high level” to protect the real culprits.